We’re not ashamed to admit it: we are opportunistic investors. That means looking for dislocations and overreactions by the marketplace so that we can capitalize in spaces where there may be a mismatch in pricing and value. To do that well, it’s our job to see the whole picture in global markets. Allow us to set the table for you, so to speak.
The essential storyline right now is a slower than anticipated post-pandemic recovery. Growth is trending upward, but recent geopolitical conflicts, supply chain disruptions, and the subsequent inflation rates are weighing the economy down and leading to a decline in pricing for many asset classes.
If we drill down a bit, we see that the US economy – the world’s largest – contributes nearly a quarter of the global output. Of that, about 70% is driven by consumer spending. As long as the unemployment rates remain low, spending will continue in spite of inflation spikes. Employers are adding jobs at the rate of about 450,000 every month – at this pace, it is safe to assume that Americans, in general, can afford to continue spending. Naysayers may be sounding the alarm and predicting stagflation, but with folks at work and credit-fueled spending to boot, economic output continues to rise.
Let’s further examine three important components: corporations, consumers, and currency.
Corporations have little to complain about at the moment. Equity inflows are at all-time highs and CEOs are forecasting robust demand, even knowing of the challenges ahead. Corporate earnings are growing and retail investors continue to jump into equities. Corporate stock buybacks continue at a furious pace. All good indicators.
The picture isn’t quite as rosy from the consumer side. Inflation is running hotter than anyone expected and pocketbook issues are top of mind for many. Mortgage applications have slowed, along with retail sales and industrial production. Some of this has to do with decisions made by the Federal Reserve System (Fed) and they are taking swift action to correct mistakes that were made. With a 75 basis point increase expected this month, a rapid increase in interest rates may leave over-leveraged homeowners who were hoping to refinance in trouble, along with zombie companies that will not be able to repay their debts.
And what of currency, the mighty UD dollar? At a 20-year high, the USD is almost on par with the Euro and looks really strong compared to the Yen. A strong dollar makes imports cheaper however the products we export become more expensive and thereby less competitive. This will impact corporate bottom lines.
The primary variables in play are the unemployment rate, corporate earnings, and tough choices by the Fed. They have to rein in inflation to regain credibility, but how aggressively will they move? And in doing so, are they putting the brakes on an economy that was chugging ahead? It’s no easy task – bringing inflation down from the 9.1% print from last week to under 4% will be a very tough task to accomplish within the next 18 months.
It is likely that inflation will come down in the months ahead. With earnings season upon us, we’re paying close attention to corporate forecasts for future sales, profitability, and growth. This qualitative data holds clues to where we are headed.
If you’re a jump-to-the-recipe kind of person who scrolled to the end because you just want to know what the best investment opportunities are, congratulations. You’ve arrived! Our careful analysis of all the factors outlined above shows there are still many value dividend plays to be made. Infrastructure, energy, transportation, and steel are where it’s at.
